Airline industry and Porter's five forces.

1.Use Porter's five forces of competition' framework to show how the structure of the airline industry has caused low profitability during the past twenty years.

Below are Porter's five forces of competition. In them you will understand what has caused low profitability.

The bargaining power of suppliers: Labor is the airline industry's largest single expense. Most airline workers belong to one of a dozen unions, which give the airline workers strong power in negotiations with the airlines.

Airline operations are also energy-intensive, and some carriers attempt to hedge their fuel costs by buying and selling futures. Jet fuel prices are currently high because oil refiners kept jet fuel production down in 1996 as they waited for crude oil prices to dive following the return of Iraq to the market.

The bargaining power of buyers: The customers can be broken down into two main segments: business and leisure. Because business travelers often book flights at the last minute and frequently have their organization pick up the tab, they tend to be relatively price-insensitive. Consequently, business travelers generate a larger portion of the industry's revenues relative to their numbers.

The frequent flier programs were originally targeted toward the business segment. We have recently seen a trend toward expanding the frequent flier programs to let members earn miles by conducting business with a variety of other organizations. This makes the frequent flier programs a powerful tool in the leisure market as well. An attractive frequent flier program will increase the power of the airlines in the customer relationship.

Threat of entry: threat of new entrants presents new firms' possibility to enter the industry and make its returns falling down through prices competition. Since the hub and spoke system has taken place, the barrier to entry are higher because new carriers find it difficult to obtain gates and landing slots at the major hubs.

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...Abstract
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Competitors
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The fiveforces model is one way to answer the first basic question in strategic management; “Why are some industries more attractive than others?” This model shows the fiveforces that shape industry competition; threat of new entrants, bargaining power of buyers, threat of substitutes, bargaining power of suppliers, and competitors. In order to analyze the airlineindustry we have look at each of these forces.
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Choosing whether or not to enter an industry is never an easy decision to make as there are many factors to take into consideration. Porter’sfiveforces model is one of the most valuable models that can be used to determine a firm’s potential in an industry. The fiveforces model allows a firm to analyze competition and develop a competitive strategy of their own. These fiveforces consist of threats of new entrants, the power of suppliers, the power of buyers, product substitutes, and rivalry among competing firms. Using this model we will analyze the airlineindustry to determine if a new airline is a worthy investment at this time.
The threat of new entrants is usually the first force to look at. New entrants mean more competition and less market share for existing competitors. To reduce these threats, firms competing try to develop barriers to entry; these may also include government regulations. In the past the airlineindustry was heavily regulated by the government but currently, existing firms have most control. One way airlines try to prevent new entrants is by buying and selling airport slots to each other. This makes it harder for new airlines to gain any market share (Barrow). It is also becoming harder to...

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Bargaining Power of buyers
affects industry profitability by their ability to hold out for
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All aspects of this model influence how much a company will pay or receive for their certain products or services, represents the strength of your existing firm and to what degree you would have control over your current market competitors, and how viable it is to enter into the selected market.
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...STUDENT HAND-OUT
WORKSHEET ON INDUSTRY STRUCTURE
This worksheet was developed to apply Porter’sFiveForces analysis to an industry. For each of the factors listed below, place an “X” in the appropriate column (Yes, No or Moderate). Once you have completed the analysis of the fiveforces, compute the number of factors for each category, and write down the number for the overall analysis.
1. Threat of entrants:
|+ factors (favorable to industry) |Yes |Mod |No |
|- factors (unfavorable to industry) |(+) | |(-) |
|Do large firms have a cost or performance advantage in your segment of the industry? |+ | | |
|Are there any proprietary product differences in your industry? | |x | |
|Are there any established brand identities in your industry? |+ | | |
|Do your customers incur any significant costs in switching suppliers?...

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